February 2009

The New Year Brings a Recession to Texas

Over the three months ending in December, the Texas Leading Index experienced its sharpest decline since its inception in January 1981 (Chart 1). All eight of the indicators gave negative signals, with the steepest drops coming from the increase in the Texas export-weighted value of the dollar and declines in the stock index of Texas-based companies. In addition, the Texas Business-Cycle Index was revised downward, indicating Texas likely entered a recession sometime in the second half of 2008.

Texas employment growth was revised downward [1], showing a sharply negative turn in September, and then proceeded to fall further in both November and December (Chart 2).

In December the unemployment rate reached 6 percent, up 1.9 percentage points from its bottom in April 2008. Given the sharp fall in the Texas Leading Index and the negative outlook of Beige Book respondents, further increases in the unemployment rate are expected.

In December, Beige Book contacts across a wide range of industries reported further weakening in economic activity. The majority of respondents now expect a recession through midyear, with some contacts not expecting a recovery until early 2010.

Texas exports have dropped over 17 percent from the high reached in July 2008 (Chart 3). Contributing to the decline was a sharp slowing of the world economy and an appreciation of the dollar against the currencies of primary trade partners. For example, the dollar appreciated significantly against the Mexican peso, which has a powerful impact on Texas exports, as Mexico is Texas’ largest export destination.

The Texas housing market continues to weaken, although home inventories and rates of mortgage delinquencies and foreclosures suggest that markets are in better shape than the national average.

According to industry contacts, a growing concern in Texas is that commercial construction will drop sharply due to restrictive financing for the industry. While residential construction values have been in decline for some time now, nonresidential construction values are yet to show a significant drop off. This is due in part to the expansion of the Port Arthur refinery, which began in 2008. The public sector continued to add space, while private construction of hotels, stores, offices and restaurants began to decline in the closing months of 2008 (Chart 4).

Energy prices have stabilized at levels far below those seen in 2008, with oil prices fluctuating around $40 for the past month. The rig count has responded sharply—228 rigs have been removed from service since the end of November (Chart 5). Most of the decline has come from land-based natural gas rigs. Employment cutbacks are expected to hit the industry in 2009 as energy prices languish.

Of Texas’ major metros, Austin and Dallas have been hit the hardest in recent months, while Houston has fared the best (Chart 6). However, the decline in energy prices makes it likely that all major Texas metros will experience a recession in 2009.

One way to analyze the different metros’ exposure to the national downturn is by computing their job-share location quotients. The location quotient quantifies the relative concentration of a specific industry as compared with the concentration of that industry nationwide. A location quotient value greater than one represents a higher concentration in that industry than the nation as a whole, and values less than one imply a lower concentration. As shown in Table 1, Dallas and Austin are more heavily concentrated in cyclically sensitive industries like information services and simultaneously less represented in the more cyclically stable industries like education and health services. Houston is heavily weighted in the energy sector, and much of its fate this year likely rests with energy prices.

—Keith R. Phillips and Jackson Thies

Note For more detailed information refer to “FRB Dallas-Adjusted Texas Employment” by Franklin D. Berger. About the Authors Phillips is a senior economist and policy advisor at the San Antonio Branch of the Federal Reserve Bank of Dallas, and Thies is research assistant in the Research Department at the Federal Reserve Bank of Dallas.